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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Non-resident insurers: scope of UK taxing rights: the corporation tax charge: accounting periods beginning on or after 1 January 2003: 'free assets'

The Non-resident Insurance Companies Regulations 2003 (SI2003/2714) introduced a new concept of ‘free assets’. It means the amount by which the fair value (the amount obtainable on a sale to an independent person) of a permanent establishment’s assets exceeds the aggregate of its technical provisions and loan capital. ‘Technical provisions’ means, for a general insurance company, its

  • provisions for claims outstanding
  • provisions for unearned premiums
  • provisions for unexpired risksbut not its equalisation provisions.

Each of these terms takes its meaning from company law - Liabilities Items C 1 to 4 and 6 in the balance sheet format set out in section B of Schedule 3 to SI2008/410, together with notes 20, 22 and 25.

The effect is that if the permanent establishment’s actual free assets (which may be nil) fall short of the free assets given by

  • the section 11AA(2) hypothesis and
  • the regulation 3 SI2003/2714 assumptionthen the company is treated as having additional investment return profits from the excess assets. Assets attributed to the permanent establishment must be of a type and nature that an independent enterprise would hold, and be assets that the company actually does hold, even though not at, or directly attributable to, the permanent establishment.

GIM10180 explains the traditional methods used for this purpose. They are broadly consistent with regulation 3 and ICTA88/S11AA (2) – Method 1 where the activities of the permanent establishment are similar in kind to the business of the entity as a whole, and Method 2 more generally.

GIM10210+ explains the position following the adoption of Part IV the OECD Report on the Attribution of Profits to Permanent Establishments.

Existing agreements reached on the calculation of arm’s length investment return will not automatically be disturbed on the basis of the OECD Report. But the risk assessment process will have regard to the accuracy of existing approaches in the light of the methods discussed there.